Saturday, December 10, 2016

Weekend reading links

In the third quarter of 2016, the eurozone’s aggregate real GDP was a mere 1.8 per cent higher than in the first quarter of 2008. Remarkably, real domestic demand in the eurozone was 1.1 per cent lower in the second quarter of 2016 than it had been in the first quarter of 2008... In the second quarter of 2016, eurozone nominal demand was only 6.9 per cent higher than in the first quarter of 2008. So what should it have been? Assume the trend rate of real growth is 1 per cent, while the inflation target is close to 2 per cent. Then nominal demand ought to grow at about 3 per cent a year. If policymakers had achieved that, nominal demand would have risen by about 28 per cent between the first quarter of 2008 and the second quarter of 2016... According to the Conference Board, a research group, between 2007 and 2016 real GDP per head at purchasing power parity rose 11 per cent in Germany, barely changed in France, and fell 8 per cent in Spain and 11 per cent in Italy... In the third quarter of 2016, Italy’s aggregate real domestic demand was 10 per cent lower than in the first quarter of 2008, while Spain’s was still close to 11 per cent lower, as it recovered from its post-crisis fall of nearly 19 per cent. Germany’s real demand has risen by 8 per cent over the same period. But its current account surplus has risen from 7 per cent of GDP in 2007 to a forecast of just under 9 per cent in 2016.

2. Latest work of Thomas Piketty, Emanuel Saez, and Gabriel Zucman finds that since the seventies, even as the US economy doubled and despite more than $5 trillion in annual transfers, the net incomes of those in the lower half have hardly grown. Their findings,

Since 1980, the share of total income going to the top 1 percent of earners has doubled, while the bottom half’s share has narrowed. Stagnant wages for many Americans are a major culprit. In three and a half decades, their incomes have barely changed while those at the top have tripled. The source of that income gain has also shifted at the top; more is coming from returns on investments rather than wages. That makes it harder for the bottom half, with much less capital, to catch up.

The three graphics below capture the declining shares of pre-tax incomes of the bottom half, trends in real average pre-tax income, and the share of the income of the top 1% coming from wages and capital. The last one in particular underlines the importance of low capital gains taxes and how it disproportionately benefits the richest.

Their analysis of over 14000 tweets over the past two years finds that one in nine was an insult of some kind. They point to a two-pronged strategy. The primary focus is on identification of one or two main targets and vilifying them till they are no longer threatening enough. The second prong is a series of background attacks directed at a wider range of subjects.

4. Kritarchy in India is continues its disturbing march. The latest to attract the scarce time of an overburdened Supreme Court, the Chief Justice no less, is the government's demonetisation scheme. The government has rightly resisted the Supreme Court's over-reach claiming that fiscal policy is beyond judicial review. These queries and comments of the bench headed by the Chief Justice are, by any yardstick, hardly justiciable,

Can you put what you had estimated when you took the decision to scrap Rs 500 and Rs 1,000 notes? Did you make any estimation at all? Was there a plan? Or, did you take the decision just like that? If you had thought notes worth Rs 10 lakh crore would come back to the banks, did you take steps to urgently put in that much of new currency+ back in circulation? Can you produce the Cabinet note before the decision was taken... When you fixed the cap at Rs 24,000 per week on your own, you must have checked if the system can take that burden, haven’t you. See if you can fix a limit below, which the bank manager can’t send you away or ration currency.

5. Niranjan makes an interesting point about the very low number of Indians who pay taxes and its consequence for India's democracy.

Around 48 million people file income tax returns in India; the actual number of people who pay tax is lower because of those who report zero tax liabilities. The number of people who were eligible to vote in the 2014 national election was 815 million. In other words, India has one direct tax payer for every 16 voters. The imbalance between the number of people who pay income tax on the one hand and the number of people who can vote on the other hand has profound implications for the Indian social contract. It creates political incentives for successive governments to borrow money to buy votes rather than build an effective tax system that will spur economic growth. Citizens are also less likely to put pressure on governments to spend wisely on public goods.

Interesting given that democratic politics is intimately related to taxation. While liberals may decry this, the positive incentive effects of being part of a tax base and perverse incentives from not being part of the same should not be under-estimated.

The number of new drugs approved in the U.S. per dollar of research and development has fallen by half every nine years between 1950 and 2010. Approvals have risen since, though 40% are for “orphan” drugs which address diseases that afflict fewer than 200,000 people. The declining payoff to medical research is starkly illustrated by a new study by Charles Jones of Stanford University and three co-authors. It found that in the decade before 1985, years of life saved through breast cancer treatment rose steadily each year, along with the volume of research. But since 1985, improvements in mortality slowed. They calculate that each new published trial added 16 years of life per 100,000 people in 1985, and that fell to less than one year by 2006. They found the same pattern across agriculture and semiconductors: steadily declining productivity per researcher.

7. Finally, even as the debate rages on the merits of demonetization, oblivious to the difficulty of making credible judgements on such complex issues, the only thing definitive may be that it may have redefined the narrative surrounding black money. It has drawn attention to the role of black money and informal economy and their close intersection, benefits of financial inclusion, the potential of digital cash, and the need to stem the generation of future black money. And it has definitely provided a massive impetus in potentially ushering in a structural shift in the economy, in moving towards a less cash economy and shrinking the informal economy.

As far as I see there could potentially be three important debates about the scheme. Could the same benefits have been achieved without demonetization? Could the post-announcement planning and actions have been swifter and better co-ordinated? Finally, will the government follow up with the complementary measures to limit the future flow of black money? Unfortunately, none of the three have received the amount of attention and interest that they deserve.